Boeing 2010 Annual Report Download - page 22

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extended periods. In these cases the associated financial risks are primarily in lower profit rates or
program cancellation if cost, schedule or technical performance issues arise. Programs whose
contracts are primarily cost-type include GMD, BCTM, P-8A Poseidon, Proprietary programs, JTRS,
FAB-T and the EA-18G Growler.
We enter into contracts that include in-orbit incentive payments that subject us to risks.
Contracts in the commercial satellite industry and certain government satellite contracts include in-orbit
incentive payments. These in-orbit payments may be paid over time after final satellite acceptance or
paid in full prior to final satellite acceptance. In both cases, the in-orbit incentive payment is at risk if the
satellite does not perform to specifications for up to 15 years after acceptance. The net present value
of in-orbit incentive fees we ultimately expect to realize is recognized as revenue in the construction
period. If the satellite fails to meet contractual performance criteria, customers will not be obligated to
continue making in-orbit payments and/or we may be required to provide refunds to the customer and
incur significant charges.
We use estimates in accounting for many contracts and programs. Changes in our estimates
could adversely affect our future financial results.
Contract and program accounting require judgment relative to assessing risks, estimating revenues
and costs and making assumptions for schedule and technical issues. Due to the size and nature of
many of our contracts and programs, the estimation of total revenues and cost at completion is
complicated and subject to many variables. Assumptions have to be made regarding the length of time
to complete the contract or program because costs also include expected increases in wages, material
prices and allocated fixed costs. Incentives or penalties related to performance on contracts are
considered in estimating sales and profit rates, and are recorded when there is sufficient information
for us to assess anticipated performance. Suppliers’ assertions are also assessed and considered in
estimating costs and profit rates. Estimates of award fees are also used in sales and profit rates based
on actual and anticipated awards.
Under program accounting, inventoriable production costs (including overhead), program tooling costs
and routine warranty costs are accumulated and charged as cost of sales by program instead of by
individual units or contracts. A program consists of the estimated number of units (accounting quantity)
of a product to be produced in a continuing, long-term production effort for delivery under existing and
anticipated contracts limited by the ability to make reasonably dependable estimates. To establish the
relationship of sales to cost of sales, program accounting requires estimates of (a) the number of units
to be produced and sold in a program, (b) the period over which the units can reasonably be expected
to be produced and (c) the units’ expected sales prices, production costs, program tooling and routine
warranty costs for the total program. Several factors determine accounting quantity, including firm
orders, letters of intent from prospective customers and market studies. Such estimates are
reconsidered throughout the life of our programs. Changes in underlying assumptions, supplier
performance, circumstances or estimates concerning the selection of the accounting quantity or
changes in market conditions, along with a failure to realize predicted costs, may adversely affect
future financial performance.
Because of the significance of the judgments and estimation processes described above, it is likely that
materially different sales and profit amounts could be recorded if we used different assumptions or if
the underlying circumstances were to change. Changes in underlying assumptions, circumstances or
estimates may adversely affect future period financial performance. For additional information on our
accounting policies for recognizing sales and profits, see our discussion under “Management’s
Discussion and Analysis—Critical Accounting Policies—Contract Accounting/Program Accounting” on
pages 42 - 44 and Note 1 to our Consolidated Financial Statements on pages 56 - 57 of this
Form 10-K.
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